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Startup Company Formation and Management Academic Entrepreneurship for Medical and Health Scientists Volume 1 Issue 2 Finance Article 10 9-27-2019 Startup Company Formation and Management Jenny Cai Bristol Myers Squibb Ben Doranz Integral Molecular, Inc Follow this and additional works at: https://repository.upenn.edu/ace Part of the Entrepreneurial and Small Business Operations Commons Recommended Citation Cai, Jenny and Doranz, Ben (2019) "Startup Company Formation and Management," Academic Entrepreneurship for Medical and Health Scientists: Vol. 1 : Iss. 2 , Article 10. Available at: https://repository.upenn.edu/ace/vol1/iss2/10 This paper is posted at ScholarlyCommons. https://repository.upenn.edu/ace/vol1/iss2/10 For more information, please contact [email protected]. The Academic Entrepreneurship for Medical and Health Scientists book project is free to all – we don’t ask for money but we truly value your feedback. Below are two links -- one to a brief feedback survey and the other to a place where you can sign up to join our community of innovators and problem solvers. You can visit them and give tell us what you think now OR after you've had the chance to read this chapter -- either one works for us! Please complete our brief feedback survey https://redcap.chop.edu/surveys/?s=HDXK3CE48L Join our growing community of Academic Entrepreneurs! https://bit.ly/3bnWTuD Startup Company Formation and Management Summary • Startups are often built with a small team of talented and highly motivated individuals who are passionate about the company. • The environment of a startup is often demanding, with time-sensitive projects and limited resources. • The three common types of business entities for a startup are an LLC, an S corp, and a C corp, and each offers its own advantages based on the startup’s trajectory and goals for growth. • Delaware’s corporate laws and statutes are pro-business, and many companies choose to incorporate in Delaware. • State law requires that corporations hold shareholder and board of directors meetings to vote on crucial company decisions and document them officially in meeting minutes. • Seeking counsel from a tax advisor and a legal advisor early on can potentially contribute to a startup’s financial prospects both in the short and the long term. Creative Commons License This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License. This book chapters is available in Academic Entrepreneurship for Medical and Health Scientists: https://repository.upenn.edu/ace/vol1/iss2/10 Startup Company Formation and Management Jenny Cai1 and Ben Doranz, MBA, PhD2 Topic Relevance by Timeline Summary ● Startups are often built with a small team of talented and highly motivated individuals who are passionate about the company. ● The environment of a startup is often demanding, with time-sensitive projects and limited resources. ● The three common types of business entities for a startup are an LLC, an S corp, and a C corp, and each offers its own advantages based on the startup’s trajectory and goals for growth. ● Delaware’s corporate laws and statutes are pro-business, and many companies choose to incorporate in Delaware. ● State law requires that corporations hold shareholder and board of directors meetings to vote on crucial company decisions and document them officially in meeting minutes. ● Seeking counsel from a tax advisor and a legal advisor early on can potentially contribute to a startup’s financial prospects both in the short and the long term. Introduction Forming a startup requires having realistic expectations for the company and the employees. Startups often begin with limited resources, and so each task completed and decision executed should be carefully planned out. The purpose of this chapter is to review key decisions and steps in the formation process of a startup. For example, one of the important decisions to make with a startup is the type of corporation to file for and which state to file in. We then move on to describe 1 Bristol Myers Squibb 2 Integral Molecular, Inc. https://repository.upenn.edu/ace/vol1/iss2/10 1 STARTUP COMPANY FORMATION AND MANAGEMENT key meetings and documents necessary for startup operations and discuss resources that can pro- vide advice and counsel. Expectations for a Startup The environment for a startup is often demanding and challenging. Projects are time-sensitive and there are limited resources to operate. With a small team, each team member will often be given independence to complete tasks. This is generally a rewarding experience because there is an op- portunity to learn new skills and lead projects. Working in small teams can contribute to a close- knit environment that is dedicated and focused on completing the task and meeting deadlines (see the chapter “Building a Successful Startup Team”). Most startups offer flexible hours and schedules, but team members are expected to meet deadlines for time-sensitive projects. There is often less structure, and much of the work is driven by self- motivation and initiative to meet business milestones. Initial company seed funding is often unpredictable and typically can occur in six-month to two-year periods, with the subsequent period dependent upon obtaining additional financial support. Often, each expense is tracked carefully to maintain working cash flow. Effective management of capital is a sign of maturity for a startup. Compensation for employees often takes the form of salary and benefits that are between the range of academic and industry setting. Additionally, employees in startups are often granted equity to tie in their performance to the growth of the company. Types of Startup Companies Registering a startup as a corporation lends more credibility to the business and provides more legal protection. A limited liability company (LLC) is a very common corporate structure for a startup because of the benefits and ease of registering. The benefits of registering a young company as an LLC include avoiding double taxation, reducing restrictions for maintenance and making changes to the company, protections on personal assets from lawsuits, and a lowered cost to file. Startups may often begin as an LLC and, after expansion and growth, convert to a C or S corporation to attract investors with equity/stock options. Alternatively, startups that do not plan to issue company stock or raise funding may choose to remain as an LLC (Boitnott). S corporations are often appropriate for startups that have one class of stock and fewer than 100 shareholders. The shareholders are specified as individuals, certain trusts, and estates, with corpo- rations and partnerships excluded. In addition to limited liability, the main benefit, compared to a C corporation, is pass-through taxation where shareholders file taxes annually and report their losses and profits individually (“Business Structures”). If the company plans to remain a small business, then the S corp model may work best for its needs. Unlike with an LLC and a C corporation, registering for an S corporation is for U.S. citizens and legal residents only (“What Is an LLC? Form a Limited Liability Company”). https://repository.upenn.edu/ace/vol1/iss2/10 2 STARTUP COMPANY FORMATION AND MANAGEMENT C corporations are one of the most common corporation structures in the U.S. and allow for high growth potential. The limitations in the number of shareholders and sales of stock in an S corporation do not apply to C corporations. A C corporation can attract major investors like venture capitalists with unlimited sale of stocks and high growth potential. When the startup reaches more than 500 shareholders and/or more than $10 million in assets, it is required to register with the Securities and Exchange Commission (SEC). One of the major disadvantages is double taxation, which occurs at the company level as well as individually with shareholders’ dividends. However, most startups tend to reinvest the dividends, and so this second taxation does not apply often. Taxes are filed quarterly. The public benefit corporation is an option if the startup’s purpose contributes to a general public benefit. The startup can build or invest in a company that operates in a socially and/or environ- mentally conscious manner. Registering as a benefit corporation requires two-thirds of the shareholders’ votes and can be done when filing for articles of incorporation or making an amendment to change to this status. The application is filed with the Bureau of Corporations and Charitable Organizations. The requirements of a public benefit corporation include filing an annual benefits report to the State Department, mainly detailing the general public benefit created during the year and the compensation of each company director (“Pennsylvania Benefit Corporation”). When the startup is considering which state to incorporate in, Delaware stands out as having advantages that have favored businesses since the early 1900s. More than half of Fortune 500 companies are incorporated in Delaware. One of the main reasons is the dynamic design of Delaware’s General Corporation Law, which has regularly updated provisions to ensure flexibility in corporate structure; this is upheld in their Court of Chancery, a court established just for corporate cases. Furthermore, corporations that do not conduct business within Delaware are not liable for corporate taxes. In Delaware, a quorum for shareholder meetings is met when one-third of the voting shareholders are present (Black). Understanding Goals and Resources Creating a startup requires keeping the company goals in mind when thinking ahead and planning for sequential tasks to complete. One of the first steps in building a solid foundation for the startup is to establish the roles, decision-makers, rules for leaving the company, and personal contributions (such as funds and time commitment) of each founder and senior management. This is specified clearly in a legal document, the founders’ agreement, which is typically drawn up prior to incor- porating the company.
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